U.S. Sen. Ted Cruz, R-Texas, was one of the most vocal opponents to the Affordable Care Act and compared subsidies to a sugar addiction. / Jewel Samad/AFP/Getty Images

Written by

Thomas Buchmueller and Helen Levy

Detroit Free Press guest writers

Thomas Buchmueller

Helen Levy

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U.S. Sen. Ted Cruz’s recent remarks on the Affordable Care Act have been received negatively by fact checkers, health policy experts and Dr. Seuss scholars alike. However, one of his arguments does ring true: The idea that once the Affordable Care Act is in place, Americans will become “addicted to the subsidies, addicted to the sugar.”

In fact, most Americans are already addicted to the sugar of health insurance subsidies. This is because health insurance provided as a fringe benefit of employment — which makes up the great majority of private health insurance in this country, covering about 170 million workers and dependents — is not subject to income tax. This tax exclusion represents a sizable subsidy, one that is expected to cost the federal government more than $200 billion this year. In comparison, by 2018, when the Affordable Care Act’s health insurance exchanges are fully up and running, an estimated 20 million people who purchase private health insurance through an exchange will receive a premium tax credit, costing the Treasury around $102 billion that year.

In addition to the difference in their aggregate cost, the two subsidies differ in who benefits from them. Because the value of the tax exclusion of employer-sponsored insurance is greater for workers in higher tax brackets and for those in more costly health plans, this subsidy mostly benefits higher income families. More than 40% of the benefit goes to families in the top fifth of the income distribution. In contrast, the subsidies provided through the health insurance exchanges are greatest for families with incomes at or just above the federal poverty level and phase out at higher levels of income.

Nutritionists warn about the dangers of hidden sugar in prepared foods. As economists, we like to warn about the hidden sugar of subsidies in the tax code. In this context, the tax treatment of employer-sponsored health insurance is the high-fructose corn syrup of the health economy. It encourages employers and workers to provide overly generous insurance — that is, more than the workers would choose if they were paying for it out of after-tax income — which very likely helps drive our nation’s ever-increasing spending on health care.

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For years, economists across the political spectrum have argued that this is a tax loophole that Congress should close or at least limit. Because most lawmakers also have a sweet tooth, these arguments were ignored, and the cost of the tax exclusion grew and grew — until the Affordable Care Act. An important provision of the law, which will go into effect in 2018, is a tax on expensive, high-end health insurance plans. This so-called Cadillac tax will have the effect of capping the tax exclusion, limiting the cost of the subsidy to the federal budget and reducing incentives for the overuse of health care.

Maintaining health insurance coverage is a healthy habit that should be encouraged. The sweet new subsidies introduced by the Affordable Care Act will substantially increase private insurance enrollment among working poor and middle-class families, who for too long have not been able to afford it. At the same time, changes to the tax exclusion for employer-sponsored insurance will reduce subsidies for those Americans who don’t need the extra calories.

The result will be a fairer and more efficient system, which we view as a truly healthy outcome.

Editor’s note: This story has been updated to correct the figure for how much a premium tax credit that those who purchase health care from an exchange will cost the U.S. Treasury.